---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2010

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACTOF 1934

For the transition period from _________ to ____________

Commission file number 333-150835

BABY FOX INTERNATIONAL,
INC.(Exact name of small business issuer as specified in its
charter)

|Nevada                                           | 26-0775642                       
|------------------------------------------------ | ---------------------------------
|(State of other jurisdiction of incorporation or | (IRS Employer identification No.)
|organization)                                    |                                  

Shanghai Minhang District 89 Xinbang Road, Suite 305-B5
The People's Republic of China(Address of principal executive
offices)

+ 86 21 5415 3855(Registrant's telephone
number, including area code)

Indicated by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [   ] No [   ]

Indicate by check mark whether the registrant is a large
accelerate filer, an accelerate filer, a non-accelerated filer, or a smaller
reporting company. See the definition of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

|Large accelerated filer [   ] | Accelerated filer [   ]      
|----------------------------- | -----------------------------
|Non-accelerated filer [   ]   | Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No
[X]

Number of shares of common stock outstanding as of February 10,
2011: 40,447,500

---

INDEX

|                                   |                                                                                                                                                                             | Page No.
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|PART I FINANCIAL
      INFORMATION |                                                                                                                                                                            
|Item 1.                            | Financial Statements                                                                                                                                                        |         
|                                   | Condensed Consolidated Balance
      Sheets (unaudited) as of December 31, 2010 and as of June 30, 2010                                                                     | 1       
|                                   | Condensed Consolidated Statements of Operations
      and Other Comprehensive Income (Loss) for the Three and Six Months Ended
      December 31, 2010 and 2009 (unaudited) | 2       
|                                   | Condensed Consolidated
      Statements of Cash Flows for the Six Months Ended December 31, 2010 and
      2009 (unaudited)                                                 | 3       
|                                   | Notes to Condensed Consolidated Financial
      Statements (unaudited)                                                                                                      | 4       
|Item 2.                            | Management's Discussion and
      Analysis of Financial Condition And Results of Operations                                                                                 | 15      
|Item 3.                            | Quantitative and Qualitative Disclosure About
      Market Risk                                                                                                             | 26      
|Item 4.                            | Controls and Procedures                                                                                                                                                     | 27      
|PART II OTHER INFORMATION          |                                                                                                                                                                            
|Item 1.                            | Legal Proceedings                                                                                                                                                           | 28      
|Item 1A.                           | Risk Factors                                                                                                                                                                | 28      
|Item 2.                            | Unregistered Sales of Equity
      Securities and Use of Proceeds                                                                                                           | 28      
|Item 3.                            | Defaults Upon Senior Securities                                                                                                                                             | 28      
|Item 4.                            | (Removed and Reserved)                                                                                                                                                      | 28      
|Item 5.                            | Other Information                                                                                                                                                           | 28      
|Item 6.                            | Exhibits                                                                                                                                                                    | 28      
|SIGNATURES                         | 29                                                                                                                                                                         

---

FORWARD LOOKING STATEMENTS

Information included or incorporated by reference in this
annual report may contain forward-looking statements. This information may
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
the future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "should," "expect," "anticipate,"
"estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.

This annual report contains forward-looking statements,
including statements regarding, among other things, (a) our projected sales and
profitability, (b) our plans for growth, (c) our relationship with our key
manufacturers, (d) the regulation to which we are subject, (e) anticipated
trends in our industry and (f) our needs for working capital. These statements
may be found under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as in this annual report
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this annual report generally. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this annual
report will in fact occur.

Except as otherwise required by applicable laws, we undertake
no obligation to publicly update or revise any forward-looking statements or the
risk factors described in the annual report, whether as a result of new
information, future events, changed circumstances or any other reason after the
date of this annual report.

---

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BABY FOX INTERNATIONAL, INC. AND SUBSIDIARY CONDENSED
CONSOLIDATED BALANCE SHEETS(UNAUDITED )

|                                                                                                                                                                                          |   | December 31, |   |   | June 30,   |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | - | ---------- | -
|                                                                                                                                                                                          |   | 2010         |   |   | 2010       |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|ASSETS                                                                                                                                                                                    |  
|CURRENT ASSETS:                                                                                                                                                                           |   |              |   |   |            |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|Cash                                                                                                                                                                                      | $ | 274,375      |   | $ | 180,476    |  
|Accounts Receivable, net                                                                                                                                                                  |   | 4,796,803    |   |   | 2,863,542  |  
|Inventory, net                                                                                                                                                                            |   | 10,087,130   |   |   | 6,808,309  |  
|Prepaid expenses and other current assets                                                                                                                                                 |   | 168,615      |   |   | 158,536    |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|TOTAL CURRENT ASSETS                                                                                                                                                                      |   | 15,326,923   |   |   | 10,010,863 |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|Property and equipment, net                                                                                                                                                               |   | 53,692       |   |   | 51,037     |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|Deferred tax asset, net                                                                                                                                                                   |   | -            |   |   | -          |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|Deposits                                                                                                                                                                                  |   | 210,022      |   |   | 207,101    |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|TOTAL ASSETS                                                                                                                                                                              | $ | 15,590,637   |   | $ | 10,269,001 |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|LIABILITIES AND
      STOCKHOLDERS' DEFICITS                                                                                                                                              |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|CURRENT LIABILITIES:                                                                                                                                                                      |   |              |   |   |            |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|Accounts payable - Trade                                                                                                                                                                  | $ | 712,277      |   | $ | 515,298    |  
|Accounts payable - related
    party                                                                                                                                                      |   | 12,466,235   |   |   | 9,510,853  |  
|Deposits payable & customer advances                                                                                                                                                      |   | 1,368,332    |   |   | 1,263,502  |  
|Accrued expenses and other current liabilities                                                                                                                                            |   | 3,715,256    |   |   | 2,751,220  |  
|Loans payable - officer and stockholder                                                                                                                                                   |   | 37,296       |   |   | 35,341     |  
|Current portion of long-term debt                                                                                                                                                         |   | 1,615,655    |   |   | 1,575,638  |  
|Dividends payable                                                                                                                                                                         |   | 864,107      |   |   | 842,704    |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                                 |   | 20,779,158   |   |   | 16,494,556 |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|LONG-TERM DEBT                                                                                                                                                                            |   | 810,160      |   |   | 810,160    |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|STOCKHOLDERS' DEFICIENCY                                                                                                                                                                  |   |              |   |   |            |  
|Preferred Stock, $0.001 par value, 10,000,000 shares
      authorized, -0- shares issued and outstanding                                                                                  |   | -            |   |   | -          |  
|Common Stock, $0.001 par value, 90,000,000
      shares authorized, 40,447,500 and 40,427,500 shares issued and outstanding
      as of December 31, 2010 and June 30, 2010, respectively |   | 40,447       |   |   | 40,427     |  
|Additional paid-in capital                                                                                                                                                                |   | 69,980       |   |   | -          |  
|Accumulated deficits                                                                                                                                                                      |   | (5,987,084   | ) |   | (7,095,053 | )
|Accumulated other comprehensive income                                                                                                                                                    |   | (122,024     | ) |   | 18,911     |  
|                                                                                                                                                                                          |   |              |   |   |            |  
|TOTAL STOCKHOLDERS' DEFICIENCY                                                                                                                                                            |   | (5,998,681   | ) |   | (7,035,715 | )
|                                                                                                                                                                                          |   |              |   |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY                                                                                                                                            | $ | 15,590,637   |   | $ | 10,269,001 |  

See accompanying notes to unaudited condensed consolidated
financial statements

1

---

BABY FOX INTERNATIONAL, INC. AND
SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER
COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

|                                                            |   | FOR THREE MONTHS ENDED |   |   | FOR SIX MONTHS ENDED |  
|----------------------------------------------------------- | - | ---------------------- | - | - | -------------------- | -
|                                                            |   | DECEMBER 31            |   |   | DECEMBER 31          |  
|                                                            |   | 2010                   |   |   | 2009                 |  
|                                                            |   |                        |   |   |                      |  
|                                                            |   |                        |   |   |                      |  
|SALES                                                       |   |                        |   |   |                      |  
|Corporate stores                                            | $ | 6,359,878              |   | $ | 6,880,406            |  
|Non-corporate stores                                        |   | 405,256                |   |   | 629,235              |  
|TOTAL SALES                                                 |   | 6,765,134              |   |   | 7,509,641            |  
|                                                            |   |                        |   |   |                      |  
|COST OF GOODS SOLD                                          |   |                        |   |   |                      |  
|Corporate stores                                            |   | 2,690,188              |   |   | 3,391,686            |  
|Non-corporate stores                                        |   | 313,358                |   |   | 426,352              |  
|TOTAL COST OF GOODS SOLD                                    |   | 3,003,546              |   |   | 3,818,038            |  
|                                                            |   |                        |   |   |                      |  
|GROSS PROFIT                                                |   | 3,761,588              |   |   | 3,691,603            |  
|                                                            |   |                        |   |   |                      |  
|                                                            |   |                        |   |   |                      |  
|OPERATING EXPENSES:                                         |   |                        |   |   |                      |  
|Selling Expenses                                            |   | 3,163,031              |   |   | 3,847,214            |  
|General & Administrative Expenses                           |   | (275,396               | ) |   | 198,607              |  
|TOTAL OPERATING EXPENSES                                    |   | 2,887,635              |   |   | 4,045,821            |  
|                                                            |   |                        |   |   |                      |  
|INCOME (LOSS) FROM OPERATIONS                               |   | 873,953                |   |   | (354,218             | )
|                                                            |   |                        |   |   |                      |  
|Other income                                                |   | 2,131                  |   |   | -                    |  
|Interest expense                                            |   | 31,497                 |   |   | 31,046               |  
|                                                            |   |                        |   |   |                      |  
|TOTAL OTHER EXPENSE                                         |   | (29,366                | ) |   | (31,046              | )
|                                                            |   |                        |   |   |                      |  
|INCOME (LOSS) BEFORE TAXES                                  |   | 844,587                |   |   | (385,264             | )
|                                                            |   |                        |   |   |                      |  
|INCOME TAX PROVISION                                        |   |                        |   |   |                      |  
|Current                                                     |   | -                      |   |   | -                    |  
|Deferred                                                    |   | -                      |   |   | -                    |  
|TOTAL INCOME TAX PROVISION                                  |   | -                      |   |   | -                    |  
|                                                            |   |                        |   |   |                      |  
|NET INCOME (LOSS)                                           | $ | 844,587                |   | $ | (385,264             | )
|                                                            |   |                        |   |   |                      |  
|OTHER COMPREHENSIVE INCOME (LOSS):                          |   |                        |   |   |                      |  
|Foreign currency translation loss                           |   | (60,841                | ) |   | 9,857                |  
|                                                            |   |                        |   |   |                      |  
|COMPREHENSIVE INCOME (LOSS)                                 | $ | 783,746                |   | $ | (375,407             | )
|                                                            |   |                        |   |   |                      |  
|                                                            |   |                        |   |   |                      |  
|BASIC AND DILUTED INCOME (LOSS) PER SHARE                   |   | 0.02                   |   |   | (0.01                | )
|                                                            |   |                        |   |   |                      |  
|BASIC AND DILUTED WEIGHTED AVERAGE SHARES
      OUTSTANDING |   | 40,447,500             |   |   | 40,427,500           |  

See accompanying notes to unaudited condensed consolidated
financial statements

2

---

BABY FOX INTERNATIONAL, INC. AND
SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                                   |   | FOR THE SIX MONTHS
      ENDED DECEMBER 31 |  
|-------------------------------------------------------------------------------------------------- | - | ------------------------------------------ | -
|                                                                                                   |   | 2010                                       |  
|                                                                                                   |   |                                            |  
|OPERATING ACTIVITIES:                                                                              |   |                                            |  
|Net income (loss)                                                                                  | $ | 1,107,969                                  |  
|Adjustments to reconcile net
    income
    (loss) to net
      cash used in operating activities: |   |                                            |  
|Depreciation expense                                                                               |   | 8,740                                      |  
|Bad debt allowance                                                                                 |   | (352,532                                   | )
|Inventory reserve                                                                                  |   | (1,485,204                                 | )
|Valuation allowance
      on deferred tax assets                                                   |   | (234,449                                   | )
|Common stock issued for legal services                                                             |   | 70,000                                     |  
|                                                                                                   |   |                                            |  
|Decrease (increase) in current assets                                                              |   |                                            |  
|Accounts receivable                                                                                |   | (1,484,672                                 | )
|Inventory                                                                                          |   | (1,581,757                                 | )
|Advance to vendors                                                                                 |   | -                                          |  
|Deposit                                                                                            |   | 2,310                                      |  
|Prepaid expenses and sundry current assets                                                         |   | (5,977                                     | )
|Deferred tax                                                                                       |   | 234,449                                    |  
|Increase (decrease) in current
      liabilities                                                   |   |                                            |  
|Accounts payable-trade                                                                             |   | 181,584                                    |  
|Accrued expenses, taxes and sundry current
      liabilities                                       |   | 885,604                                    |  
|Customer deposits and advances                                                                     |   | 71,828                                     |  
|                                                                                                   |   |                                            |  
|NET CASH USED IN OPERATING ACTIVITIES                                                              |   | (2,582,107                                 | )
|                                                                                                   |   |                                            |  
|INVESTING ACTIVITIES:                                                                              |   |                                            |  
|Acquisition of property and equipment                                                              |   | (10,082                                    | )
|                                                                                                   |   |                                            |  
|NET CASH USED IN INVESTING
      ACTIVITIES                                                        |   | (10,082                                    | )
|                                                                                                   |   |                                            |  
|FINANCING ACTIVITIES:                                                                              |   |                                            |  
|Accounts payable- affiliated company                                                               |   | 2,679,800                                  |  
|Proceeds of stockholder loan                                                                       |   | 1,044                                      |  
|Proceeds from long-term debt                                                                       |   | -                                          |  
|                                                                                                   |   |                                            |  
|NET CASH PROVIDED BY FINANCING
      ACTIVITIES                                                    |   | 2,680,844                                  |  
|                                                                                                   |   |                                            |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH
      EQUIVALENTS                                        |   | 5,244                                      |  
|                                                                                                   |   |                                            |  
|NET INCREASE (DECREASE) IN CASH                                                                    |   | 93,899                                     |  
|                                                                                                   |   |                                            |  
|CASH - BEGINNING OF THE PERIOD                                                                     |   | 180,476                                    |  
|                                                                                                   |   |                                            |  
|CASH - END OF THE PERIOD                                                                           | $ | 274,375                                    |  

See accompanying notes to unaudited condensed consolidated
financial statements

3

---

|1. | BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
|-- | ----------------------------------------------

Business description

Baby Fox International, Inc. (the "Company"), through its
wholly-owned subsidiary Shanghai Baby Fox Fashion Co., Ltd. ("Shanghai Baby
Fox") is a specialty retailer, developer and designer of fashionable,
value-priced women's apparel and accessories. The Company primarily sells
merchandise through its corporate-owned stores located within upscale shopping
malls across China. The mall operator collects the proceeds of sales from
customers and remits the proceeds, net of rent and other charges, to the
Company.

In addition, the Company sells merchandise to licensed
non-corporate owned stores which only carry the Baby Fox brand merchandise.

Basis of presentation

The Company's accounting policies used in the preparation of
the accompanying unaudited consolidated financial statements conform to
accounting principles generally accepted in the United States of America ("US GAAP") and have been consistently applied.

In the opinion of management, the Company's unaudited
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals) that are considered necessary for a fair presentation of
consolidated results of operations, financial position and cash flows as of and
for the periods present. Operating results for the three months and six months
ended December 31, 2010 are not necessarily indicative of the results that may
be expected for the year ending June 30, 2011.

The balance sheet at June 30, 2010 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by GAAP for complete financial
statements.

Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year presentation.

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

Principle of consolidation

The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary, Shanghai Baby Fox. All significant
inter-company balances and transactions have been eliminated.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net revenue and expenses during each
reporting period. The Company's significant estimates include estimates for
reserves for inventory markdowns, allowance for doubtful accounts and useful
lives of property and equipment. Actual results could differ from those
estimates.

Foreign currency translation

The reporting currency of the Company is the US dollar. The
functional currency of Baby Fox International is the US dollar. Shanghai Baby
Fox uses its local currency, the Chinese Renminbi ("RMB") as its functional
currency. In accordance with accounting standards regarding foreign currency
translation, results of operations and cash flows are translated at the average
exchange rates during the period, assets and liabilities are translated at the
exchange rates at the balance sheet dates, and equity is translated at the
historical exchange rates. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheets.

4

---

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Foreign currency translation (continued)

Translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Gains and losses
from foreign currency transactions are included in the results of operations.
The Company did not have any material transaction gain or loss for three months
and six months ended December 31, 2010 and 2009.

Revenue recognition and return policy

The Company recognizes revenue in accordance with accounting
standards regarding revenue recognition, which specifies that revenue is
realized or realizable and earned when four criteria are met:

- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable; and
- Collectability of payment is reasonably assured.

The Company's revenues are generated from sales at its
company-owned retail stores and from sales of merchandise to licensed
non-corporate owned stores.

Revenues from sales at company owned retail stores are
recognized when the ultimate customer purchases the merchandise in the store and
pays for it at the cash register. Customers have the right to return merchandise
for credit, exchange or refunds for up to fourteen days after purchase. The
return policy is set by corporate headquarters and is consistent among all our
corporate stores. The period allowed for returns is short (two weeks) and based
on historical experience, and actual returns by end consumers have been rare and
immaterial across all retail stores. Management will keep monitoring returns by
end consumers at our corporate stores as we open more stores each period.

Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, and no other significant
obligations of the Company exist and collectability is reasonably assured.
According to the contract, non-corporate stores have the right to return
defective merchandise within ten days of receipt. Return of unsold merchandise
for current style is determined by our headquarters and full cooperation from
non-corporate stores is required. Reserves are established to reflect actual and
anticipated losses resulting from the returns of defective and unsold
merchandise based on historical information. Currently we estimate returns to be
20% of our sales to non-corporate stores and relevant reserves have been made
accordingly each reporting period. Since fashion clothing is trending towards
shorter product life cycle and the return period we allow for non-corporate
stores is relatively long, the current reserve already takes into the effect of
introducing new products on expected return of previous products. The return
reserve based on this percentage of sales has been consistent with actual
returns in our operating history. The balances of the return reserve as of
December 31, 2010 and 2009 were $24,348 and $122,617, respectively. We will
closely monitor returns for existing and new stores and adjust reserve for
returns if necessary. We do not offer early payment discounts, incentive
discounts based on volume or credit for products that do not sell well at
non-corporate stores.

Shipping and handling of merchandise sold to non-corporate
stores is included in revenue and not separately billed to customers or paid
directly by the customer.

Cost of sales

Cost of sales includes the cost of merchandise sold and related
costs including purchasing, receiving, warehousing and related costs.

5

---

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Advertising expense

Advertising expense is charged to operations as incurred and
totaled approximately $-0- and $13,052 for the three months ended December 31,
2010 and 2009 and $8,215 and 22,079 for the six months ended December 31, 2010
and 2009, respectively.

Fair value of financial instruments

The Company adopted the provisions of Accounting Standards
Codification ("ASC") 820, Fair Value Measurements and Disclosures. ASC 820
clarifies the definition of fair value, prescribes methods for measuring fair
value, and establishes a fair value hierarchy to classify the inputs used in
measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets
for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets
and liabilities in active markets, quoted prices for identical or similar assets
and liabilities in markets that are not active, inputs other than quoted prices
that are observable, and inputs derived from or corroborated by observable
market data.

Level 3-Inputs are unobservable inputs which reflect the
reporting entity's own assumptions on what assumptions the market participants
would use in pricing the asset or liability based on the best available
information.

The carrying amounts reported in the balance sheets for cash,
accounts receivable, loan receivables, other receivables, advance to suppliers,
short-term loan, accounts payable, advance from customers, other payables and
accrued expenses, approximate their fair market value based on the short-term
maturity of these instruments. The carrying value of the long-term debt
approximates fair value based on market rates and terms currently available to
the Company. The Company did not identify any other assets or liabilities that
are required to be presented on the consolidated balance sheets at fair value in
accordance with ASC 820.

Cash and cash equivalents

The Company includes in cash and cash equivalents all
short-term, highly liquid investments that mature within three months of their
acquisition date. Cash equivalents consist principally of investments in
interest-bearing demand deposit accounts and liquidity funds with financial
institutions and are stated at cost, which approximates fair value.

The Company maintains cash with financial institutions in the
People's Republic of China ("PRC") which are not insured or otherwise protected.
Should any of these institutions holding the Company's cash become insolvent, or
if the Company is unable to withdraw funds for any reason, the Company could
lose the cash on deposit with that institution.

Accounts receivable

Accounts receivable consist of amounts due from mall operators
which are generally received within sixty days and amounts due from sales to
non-corporate stores. The risk of credit loss in the Company's trade receivables
is substantially mitigated by the Company's credit evaluation process, short
collection terms from mall operators and deposits required from non-corporate
store operators. Allowances for potential credit losses are determined based on
historical experience and current evaluation of the composition of accounts
receivable. Historically, credit losses have been within management's
expectations. On December 31, 2010 and June 30, 2010, the balances of bad debt
allowance represented 10.9% and 24.3% of the outstanding accounts receivable
balances.

6

---

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Inventories

Inventories, consisting of finished goods and accessories, are
valued at the lower of cost as determined by the average cost or market. Cost
includes all expenditures incurred in bringing the goods to the point of sale
and putting them in a saleable condition. Due to the high style nature of the
Company's merchandise, slow moving, out of season and broken style merchandise
is sold to discount stores substantially below cost. Reserves are created to
reduce the carrying value of these items to market value.

The company maintains a perpetual inventory and sales report,
by store location. This is updated daily based upon shipping and sales reports.
A weekly review is made by the merchandising group and management to identify
slow moving merchandise. Merchandise, which is slow moving during the first
month at a store is reported to the head office, and is sometimes moved to other
stores, due to varying style demand in the diverse markets in China. Unsold
merchandise is then marked down, and if not sold within 90 days of receipt, it
is shipped back to the warehouse. The company then has periodic discount
warehouse sales and uses certain liquidators.

The company values inventory at the lower of cost or market,
and maintains a reserve for inventory markdowns. This encompasses current goods
held for liquidation and markdown, and application of historical percentages of
current inventory which is anticipated to be marked down and /or liquidated. The
percentage was 26% and 42% of ending inventory level as of December 31, 2010 and
June 30, 2010, respectively based on historical experience and current goods
held for liquidation, and reserves are made accordingly at each reporting
period. The company periodically adjusts the percentage based on a review of
changing ratios and the percentage of selling prices recovered through
liquidation.

Property and equipment

Property and equipment are recorded at cost. Depreciation is
provided in amounts sufficient to amortize the cost of the related assets less
estimated residual value over their useful lives using the straight line method
for financial reporting purposes. Total depreciation for the six months ended
December 31, 2010 and 2009 were $8,740 and $7,630, respectively. The useful life
and estimated residual value are as follows:

|            | Office equipment
|----------- | ----------------
|Useful life | 5 years         

Maintenance, repairs and minor renewals are charged to expense
when incurred. Replacements and major renewals are capitalized.

Income taxes

The Company accounts for income taxes in accordance with the
FASB Codification Topic 740-10-25 ("ASC 740-10-25"), which requires that
deferred tax assets and liabilities be recognized for future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition, it
requires recognition of future tax benefits, such as carryforwards, to the
extent that realization of such benefits is more likely than not and that a
valuation allowance be provided when it is more likely than not that some
portion of the deferred tax asset will not be realized.

Earnings per share

Basic earnings per common share is computed on the basis of the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed on the basis of the weighted average number of
common shares and dilutive securities (such as warrants and convertible
preferred stock) outstanding. Dilutive securities having an anti-dilutive effect
on diluted earnings per share are excluded from the calculation.

7

---

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
|-- | ------------------------------------------------------

Comprehensive income

Comprehensive income is defined to include all changes in
equity except those resulting from investments by shareholders and distributions
to shareholders. Among other disclosures, all items that are required to be
recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented
with the same prominence as other financial statements. Comprehensive income
includes net income and the foreign currency translation gain, net of tax.

Statement of cash flows

In accordance with FASB issued Accounting Standards cash flows
from the Company's operations are calculated based upon the local currencies. As
a result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.

Segment reporting

The Company uses the "management approach" model for segment
reporting. The management approach model is based on the way a company's
management organized segments within the company for making operating decisions
and assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other manner
in which management disaggregates a company. The Company consists of one
reportable business segment, the sale of merchandise.

8

---

|3. | GOING CONCERN
|-- | -------------

As of December 31, 2010, the Company's current liabilities
exceeded its current assets by $5,452,235 and the Company's total liabilities
exceeded its total assets by $5,998,681. The Company's cash position on December
31, 2010 was $274,375. Our auditor has expressed their concern as to our ability
to continue as a going concern in the audit opinion of our financial statements
for the year ended June 30, 2010.

|4. | ACCOUNTS RECEIVABLE
|-- | -------------------

|                         |   | December 31, 2010 |   |   | June 30, 2010 |  
|------------------------ | - | ----------------- | - | - | ------------- | -
|Accounts receivable      | $ | 5,384,394         |   | $ | 3,784,745     |  
|Less: bad debt allowance |   | (587,591          | ) |   | (921,203      | )
|Accounts receivable, net | $ | 4,796,803         |   | $ | 2,863,542     |  

|5. | INVENTORIES
|-- | -----------

|                                     |   | December 31, 2010 |   |   | June 30, 2010 |  
|------------------------------------ | - | ----------------- | - | - | ------------- | -
|Inventories                          | $ | 13,570,922        |   | $ | 11,672,624    |  
|Less: reserve for inventory markdown |   | (3,483,792        | ) |   | (4,864,315    | )
|Inventories, net                     | $ | 10,087,130        |   | $ | 6,808,309     |  

|6. | RELATED PARTY TRANSACTIONS
|-- | --------------------------

The Company purchased 100% of its merchandise for the three and
six months ended December 31, 2010 from Changzhou CTS Fashion Co., Ltd. ("CTS")
which is owned by the majority shareholder and Chief Executive Officer ("CEO")
of the Company. Total purchases from CTS amounted to $2,459,694 and $3,245,813
for the three months and $6,992,875 and $6,726,731 for the six months ended
December 31, 2010 and 2009, respectively.

9

---

|6. | RELATED PARTY TRANSACTIONS (continued)
|-- | --------------------------------------

Total accounts payable to CTS as of December 31, 2010 and June
30, 2010 were $12,466,235 and $9,510,853, respectively. These payables do not
bear interest and are due upon demand during the normal course of business
operations.

The Company also rents warehouse and office space from CTS and
one of its board directors Ms. Fengling Wang. Total rent to CTS and Fengling
Wang, respectively, were $8,623 and $2,250 for the three months and $17,147 and
$4,473 for the six months ended December 31, 2010, and $8,419 and $2,196 for the
three months and $16,837 and $4,392 for the six months ended December 31, 2009.

On February 18, 2008, The Company entered into a loan agreement
with its CEO, Jieming Huang, pursuant to which, the Company borrowed $810,160
from Mr. Jieming Huang. The loan agreement is subject to a five-year term with
five percent (5%) annual interest payable in arrears.

|7. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|-- | ----------------------------------------------

|                          |   | December 31, 2010 |  |   | June 30, 2010 | 
|------------------------- | - | ----------------- |  | - | ------------- | 
|Employee benefits payable | $ | 103,428           |  | $ | 101,971       | 
|Salary payable            |   | 135,070           |  |   | 109,678       | 
|Store expense             |   | 72,954            |  |   | 67,171        | 
|Agency fee                |   | 2,066,400         |  |   | 1,607,950     | 
|Interest payable          |   | 340,994           |  |   | 273,198       | 
|Other current liabilities |   | 996,410           |  |   | 591,252       | 
|Total                     | $ | 3,715,256         |  | $ | 2,751,220     | 

We formally adopted an agency marketing system in October 2008.
Regional agents are an individual or a trading company who is contracted to have
exclusive and nontransferable rights to sell and promote our products in
designated areas such as a city or province. The contract term is usually for a
year and renewable 60 days prior to expiration. The agent is selected from our
target area and responsible for determining store locations within the area
(contingent upon Company approval), setting up the corporate stores in that
area, hiring store staff, and managing all stores' day-to-day operations in the
area. The agent does not have authority to raise standard prices of our products
or offer discount without our approval nor can they sell products of other brand
names in the stores. In return for their services on behalf of the Company, a
sales agent is paid a commission called an agency fee ranging from 5% to 38% of
the stores' sales revenue. As our regional agent is selected based on his or her
local expertise in sales and marketing in the area, such marketing system helps
us penetrate a target market more rapidly and provides a proper incentive for
the agent to increase our market share in that area. For the three months ended
December 31, 2010 and 2009, we incurred agency fees of $821,615 and $1,070,425,
respectively. For the six months ended December 31, 2010 and 2009, we incurred
agency fees of $1,338,003 and $1,658,708, respectively.

|8. | DIVIDENDS PAYABLE
|-- | -----------------

The Company's wholly-owned subsidiary, Shanghai Baby Fox
Fashion Co., Ltd. declared dividends on August 8, 2007 and December 10, 2007 in
the amount of approximately $415,870 and $448,237, respectively, to Fengling
Wang, its sole shareholder on record on the dates the dividends were declared.

10

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|9. | LONG-TERM DEBTS
|-- | ---------------

Long-term debt consists of the following:

|                                                                                                              |   | December 31, 2010 |  |   | June 30, 2010 | 
|------------------------------------------------------------------------------------------------------------- | - | ----------------- |  | - | ------------- | 
|Amount borrowed from our CEO, bearing
      interest at 5% per annum and due February 17, 2013                | $ | 810,160           |  | $ | 810,160       | 
|Amount borrowed from an unrelated party, bearing interest
      at 10% per annum and due June 16, 2011        |   | 860,676           |  |   | 839,359       | 
|Amount borrowed from an unrelated party,
      bearing zero interest and due June 30, 2011, guaranteed by CTS |   | 754,979           |  |   | 736,279       | 
|                                                                                                              |   | 2,425,815         |  |   | 2,385,798     | 
|Less: current portion                                                                                         |   | 1,615,655         |  |   | 1,575,638     | 
|                                                                                                              | $ | 810,160           |  | $ | 810,160       | 

Future annual principal payments of long-term debts are as follows:

Twelve months ended December 31

|2011 | $ | 1,615,655 | 
|---- | - | --------- | 
|2012 |   | -         | 
|2013 | $ | 810,160   | 

The total interest expense for the three months ended December
31, 2010 and 2009 were $31,497 and $31,046, respectively and were $62,748 and
$62,148 for the six months ended December 31, 2010 and 2009, respectively.

|10. | INCOME TAXES
|--- | ------------

The Company's earnings from continuing operations before income
taxes are as follows:

|                                                                   |  | For the three months ended
      December 31, |  
|------------------------------------------------------------------ |  | --------------------------------------------- | -
|                                                                   |  | 2010                                          |  
|Earnings from continuing operation before
      income taxes-China |  | 855,239                                       |  
|Earnings from continuing operation before income taxes-US          |  | (10,652                                       | )

|                                                                   |  | For the six months ended
      December 31, |  
|------------------------------------------------------------------ |  | ------------------------------------------- | -
|                                                                   |  | 2010                                        |  
|Earnings from continuing operation before
      income taxes-China |  | 1,199,718                                   |  
|Earnings from continuing operation before income taxes-US          |  | (91,749                                     | )

11

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|11. | INCOME TAXES (continued)
|--- | ------------------------

Deferred tax assets at December 31, 2010 and June 30, 2010
amounted to $-0- and $-0-, respectively, net of valuation allowance recorded.
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at December 31, 2010 and 2009 are as follows:

|                               |   | As of             |   |   | As of         |  
|------------------------------ | - | ----------------- | - | - | ------------- | -
|                               |   | December 31, 2010 |   |   | June 30, 2010 |  
|Bad debt allowance             | $ | 146,898           |   | $ | 235,815       |  
|Inventory provision            |   | 870,948           |   |   | 1,216,079     |  
|Net loss carried forward-China |   | 467,119           |   |   | 258,644       |  
|Net loss carried forward-US    |   | 76,046            |   |   | 44,852        |  
|Total deferred tax assets      |   | 1,561,011         |   |   | 1,755,390     |  
|Valuation allowance            |   | (1,561,011        | ) |   | (1,755,390    | )
|Net deferred tax assets        | $ | -                 |   | $ | -             |  

The Company's subsidiary is governed by the Income Tax Laws of
the PRC concerning Foreign Investment Enterprises and Foreign Enterprises and
various local income tax laws, which are subject to tax at a rate of 25% on
income reported in the statutory financial statements after appropriate tax
adjustments.

The reconciliation of income tax computed at the statutory
rates to the total income tax for the three and six months ended December 31,
2010 and 2009 is as follows:

|                                                             |  | For the three months ended
      December 31, |  
|------------------------------------------------------------ |  | --------------------------------------------- | -
|                                                             |  | 2010                                          |  
|Income tax expense (benefit) at federal
      statutory rate |  | 287,160                                       |  
|Adjustment due to:                                           |  |                                               |  
|Foreign rate differential                                    |  | (76,972                                       | )
|Other                                                        |  | (199                                          | )
|Usage of loss carried forward                                |  | (209,989                                      | )
|Increase in valuation allowance                              |  | -                                             |  
|Income tax expense                                           |  | -                                             |  

|                                                             |  | For the six months ended
      December 31, |  
|------------------------------------------------------------ |  | ------------------------------------------- | -
|                                                             |  | 2010                                        |  
|Income tax expense (benefit) at federal
      statutory rate |  | 376,709                                     |  
|Adjustment due to:                                           |  |                                             |  
|Foreign rate differential                                    |  | (107,975                                    | )
|Other                                                        |  | (34,285                                     | )
|Usage of loss carried forward                                |  | (234,449                                    | )
|Increase in valuation allowance                              |  | -                                           |  
|Income tax expense                                           |  | -                                           |  

12

---

|12. | EARNINGS PER SHARE
|--- | ------------------

Basic and diluted income (loss) per share is computed as net
income divided by the weighted-average number of common shares outstanding for
the period.

Weighted-average number of shares are as follows:

|                                                          |  | For the three months ended
      December 31, | 
|--------------------------------------------------------- |  | --------------------------------------------- | 
|                                                          |  | 2010                                          | 
|Weighted-average number of shares-basic and
      diluted |  | 40,447,500                                    | 

|                                                          |  | For the six months ended
      December 31, | 
|--------------------------------------------------------- |  | ------------------------------------------- | 
|                                                          |  | 2010                                        | 
|Weighted-average number of shares-basic and
      diluted |  | 40,439,130                                  | 

On September 16, 2010, the Company issued 20,000 shares to The
Crone Law Group for legal services valued at $70,000. The shares consisted of
10,000 shares for the firm's work on the S-1 and 10,000 shares for the reduced
hourly rate offered for the firm's on-going work.

|13. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

Leases

The Company is obligated under operating leases for their
headquarters facilities, distribution center and certain stores located in
malls. Aggregate minimum annual rentals under non-cancelable leases are as
follows:

|Fiscal year |   |         | 
|----------- | - | ------- | 
|2011        | $ | 855,643 | 
|2012        |   | 280,126 | 
|2013        |   | 8,946   | 
|2014        |   | 4,473   | 
|2015        |   | -       | 
|Thereafter  |   | -       | 

Approximately 37% of our corporate stores in malls are required
to pay minimum annual rents for the spaces leased plus additional rents
calculated based on certain percentage of actual sales over minimum amount of
sales required. The remaining stores do not have minimum annual rent requirement
but are required to pay rents based on certain percentage of actual sales over
minimum sales required. These leases can be terminated if performance does not
meet certain predetermined levels stipulated by mall operators. Rental expense
charged to operations aggregated $1,296,325 and $1,387,062 for the three months
and $2,359,420 and $2,344,970 for the six months ended December 31, 2010 and
2009, respectively.

13

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|14. | RISKS AND UNCERTAINTIES
|--- | -----------------------

Lack of Business Insurance

The Company is potentially exposed to risks of losses that may
result from business interruptions, injury to others (including employees) and
damage to property. These losses may be uninsured, especially due to the fact
that the Company's operations are in China, where business insurance is not
readily available. If: (i) information is available before the Company's
financial statements are issued or are available to be issued indicates that
such loss is probable and (ii) the amount of the loss can be reasonably
estimated, an estimated loss will be accrued by a charge to income. If such loss
is probable but the amount of loss cannot be reasonably estimated, the loss
shall be charged to the income of the period in which the loss can be reasonably
estimated and shall not be charged retroactively to an earlier period. As of
December 31, 2010, the Company has not experienced such loss.

Concentration of Vendors and Customers

For the three months ended December 31, 2010 and 2009, the
Company made 100% and 87% of its total purchase of merchandise from CTS, an
affiliated company. For the six months ended December 31, 2010 and 2009, the
Company purchased 100% and 91% of its merchandise from CTS. The balance of
payables to CTS represented 95% and 95% of the Company's outstanding accounts
payable at December 31, 2010 and June 30, 2010, respectively.

No single customer accounted for more than 10% for the total
sales for the three and six months ended December 31, 2010 and 2009.

14

---

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

The following discussion and analysis of the results of
operations and financial condition of Baby Fox International, Inc. ("Baby Fox")
for the three and six months ended December 31, 2010 and 2009 should be read in
conjunction with Baby Fox' consolidated financial statements, and the notes to
those financial statements that are included elsewhere in this quarterly report.
Our discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including those set forth under
the Risk Factors and Business sections in this annual report. We use words such
as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect,"
"believe," "intend," "may," "will," "should," "could," and similar
expressions to identify forward-looking statements.

Our Company

Baby Fox International Inc., a Nevada corporation organized on
August 13, 2007, is a holding company whose primary business operations are
conducted through our wholly-owned China subsidiary Shanghai Baby Fox Fashion
Co., Ltd. (together "Baby Fox" or "the Company"). Shanghai Baby Fox Fashion Co.,
Ltd. ("Shanghai Baby Fox") was originally founded by our board director, Fengling Wang, under Chinese law in March of 2006. On September 20, 2007, we
entered into an Equity Share Acquisition Agreement with Fengling Wang in which
we purchased 100% of the equity shares of Shanghai Baby Fox in exchange for RMB
5.72 million (approximately US$806,608). The acquisition was consummated on
November 26, 2007 when we received the Certificate of Approval from the Shanghai
Foreign Economic Relation & Trade Commission.

Shanghai Baby Fox is a China-based specialty retailer,
developer, and designer of fashionable, value-priced women's apparel and
accessories. The company's products are aimed to target women aged 18 to 40 in
China. It continuously updates its fashions and clothing designs to stay in sync
with the latest fashions and trends in Korea, Japan, & Europe. Since the
launch of its first retail mall store in July 2006, the brand has gained
exposure in leading women's magazines and the company has 162 stores in over 30
cities as of December 31, 2010.

Listing on the OTC Bulletin Board

On August 6, 2010, the Company's S-1/A was approved by SEC. On
October 6, 2010, the Company's common stock was approved by FINRA for trading on
the OTC Bulletin Board under the ticker symbol "BBYF.OB", which was subsequently
changed to "BBFX.OB" on October 29, 2010.

Principal Factors Affecting Our Financial Performance

We believe that the following factors will continue to affect
our financial performance:

Continued growth of Chinese women's apparel industry.
While China has one of the most promising apparel markets in the world, ladies'
wear remains the largest sub-sector of this market. According to surveys
conducted by China National Commercial Information Center (CNCIC) to over 260
major department stores across China, ladies' wear continued to be the largest
contributor to total apparel sales. Ladies' wear accounted for 27.4% in first
half of 2009 and 28.5% in 2008 (the most recent available data from Li &
Fung Research Center's research report "Latest Developments of China's Apparel
Market," (Issue Number 15 in December 2009). We believe our strong knowledge of
local markets, media contacts and brand image we have built, and award winning
design experience give the organization significant competitive advantages in
this rapidly growing market.

Experienced management and design team. Women in China
have become increasingly selective in their choice of clothing and the Chinese
fashion industry is trending towards shorter product life cycles and better
designs and development. The ability to respond to instantaneous fashion trends is a key
attribute to the success of an apparel company. Baby Fox is at the forefront of
trends by having an experienced management and designer team to launch a garment
from design to production, and finally to distribution in just weeks. The
Company brings together a complimentary mix of industry expertise, management
know-how, and product innovation. Collectively, the management team has strong
fashion design, operations, and apparel sales experience. Through the Company's
extensive relationships with leading fashion magazines, apparel manufacturers,
and related industry leaders, the Company also has access to a large pool of
experienced managers and knowledgeable advisors.

15

---

Store expansion plan. The Company has 162 corporate and
non-corporate stores in over 30 cities as of December 31, 2010. Corporate stores
are primarily opened in major metropolitan areas and non-corporate or "licensed"
stores are mostly established in suburban communities. We plan to continue
growing retail store locations over next few years but due to liquidity
constraint, we will be more focused on location selections. We will also
increase our efforts to improve sales at current stores and remove
non-performing store locations in a timely fashion.

While Baby Fox could rapidly scale non-corporate stores with
minimal capital requirement, management's preference is to expand via corporate
owned stores in major cities and use licensed non-corporate stores in the
2nd and 3rd tier cities. The economics of this strategy
help the Company better manage overall cash flow and inventory levels and
rapidly scale the business in a measured manner. By covering greater
geographical regions, the store expansion plan will increase our sales and add
to the reach of our brand image.

PRC Taxation

Our subsidiary Shanghai Baby Fox is governed by the Income Tax
Law of the People's Republic of China concerning Foreign Investment Enterprises
("FIE") and Foreign Enterprises and various local income tax laws (the Income
Tax Laws), which is 25%.

Results of Operations

The following table sets forth key components of our results of
operations for the periods indicated, in US dollars:

|                                                |   | For the three months ended
      December 31, | 
|----------------------------------------------- | - | --------------------------------------------- | 
|                                                |   | 2010                                          | 
|                                                |   | (unaudited)                                   | 
|Total sales                                     | $ | 6,765,134                                     | 
|Cost of goods sold                              |   | 3,003,546                                     | 
|                                                |   |                                               | 
|Gross profit                                    |   | 3,761,588                                     | 
|                                                |   |                                               | 
|Selling, general and administrative expenses    |   | 2,887,635                                     | 
|                                                |   |                                               | 
|Income (loss) before provision for income taxes |   | 844,587                                       | 
|Income taxes                                    |   | -                                             | 
|                                                |   |                                               | 
|Net income (loss)                               | $ | 844,587                                       | 

16

---

|                                                |   | For the six months ended
      December 31, | 
|----------------------------------------------- | - | ------------------------------------------- | 
|                                                |   | 2010                                        | 
|                                                |   | (unaudited)                                 | 
|Total sales                                     | $ | 12,020,072                                  | 
|Cost of goods sold                              |   | 4,970,030                                   | 
|                                                |   |                                             | 
|Gross profit                                    |   | 7,050,042                                   | 
|                                                |   |                                             | 
|Selling, general and administrative expenses    |   | 5,888,187                                   | 
|                                                |   |                                             | 
|Income (loss) before provision for income taxes |   | 1,107,969                                   | 
|Income taxes                                    |   | -                                           | 
|                                                |   |                                             | 
|Net income (loss)                               | $ | 1,107,969                                   | 

The following table sets forth the results of our operations
for the periods indicated as a percentage of total sales:

|                                                |  | For the three months ended
      December 31, | 
|----------------------------------------------- |  | --------------------------------------------- | 
|                                                |  | 2010                                          | 
|                                                |  | (unaudited)                                   | 
|Total sales                                     |  | 100.0%                                        | 
|Cost of goods sold                              |  | 44.4%                                         | 
|                                                |  |                                               | 
|Gross profit                                    |  | 55.6%                                         | 
|                                                |  |                                               | 
|Selling, general and administrative expenses    |  | 42.7%                                         | 
|                                                |  |                                               | 
|Income (loss) before provision for income taxes |  | 12.5%                                         | 
|Income taxes                                    |  | 0.0%                                          | 
|                                                |  |                                               | 
|Net income (loss)                               |  | 12.5%                                         | 

17

---

|                                                |  | For the six months ended
      December 31, | 
|----------------------------------------------- |  | ------------------------------------------- | 
|                                                |  | 2010                                        | 
|                                                |  | (unaudited)                                 | 
|Total sales                                     |  | 100.0%                                      | 
|Cost of goods sold                              |  | 41.3%                                       | 
|                                                |  |                                             | 
|Gross profit                                    |  | 58.7%                                       | 
|                                                |  |                                             | 
|Selling, general and administrative expenses    |  | 49.0%                                       | 
|                                                |  |                                             | 
|Income (loss) before provision for income taxes |  | 9.2%                                        | 
|Income taxes                                    |  | 0.0%                                        | 
|                                                |  |                                             | 
|Net income (loss)                               |  | 9.2%                                        | 

Comparison of Three Months and Six Months ended December
31, 2010

Starting from the beginning of FY2010, the Company has adjusted
its strategy to slow down the new store openings and focus on digesting
inventory of past seasons and improving revenue and margin from existing stores.
The Company has also established a tiered inventory digesting structure through
Class A stores, Class B stores and warehouse sales. Class A stores sell current
season products at full price, Class B stores sell one-year-old products at a
30-50% discount while warehouse sales digest products aged more than one year at
a 80-90% discount. Class A stores are expected to sell 70% of products of each
season with the rest sold through Class B stores and warehouse sales. The tiered
structure would ensure that most, if not all of the inventory can be digested
within 24 months after production. Also based on the Class A and B stores system
formally adopted in fiscal 2009 to better match price and product demand by
different target market segments, a Class A store that does not meet our sales
expectation will first be downgraded to Class B store which are being used to
provide discounted merchandise that did not sell well during the season at Class
A stores. When the lease with the mall operator expires, we will evaluate again
and if a Class B store's sales performance still doesn't improve, we will close
the store instead of renewing the lease.

Sales.Our sales are generated from sales of products to
end customers in our corporate stores and sales to non-corporate store owners.
For the three months ended December 31, 2010 and 2009, the Company generated
revenues of $6,765,134 and $7,509,641, respectively, reflecting a decrease of
9.9% . Excluding exchange rate effect, sales at corporate stores decreased 9.7%
while sales to non-corporate stores declined 37.3% . The decline in sales is
mainly due to the stock replenishment issue as a result of a nation-wide
restriction on power supply to achieve the energy saving and emission reduction
target for the Chinese government's "11th Five-Year Plan". The
restriction led to raw material replenishment issues for CTS, the company's
major supplier and impacted the replenishment of goods for both corporate and
non-corporate stores. In addition, a change in one of the major sales periods,
the Mid-Autumn Festival, from October in 2009 to September in 2010 resulted in a
shift of the revenue period from the second quarter to the first quarter in
2010, and also contributed to the sales decline for the three months ended
December 31, 2010 as compared to the same period last year. A reduced number of
non-corporate stores also contributed to the decline in non-corporate store
sales. For the three months ended December 31, 2010, sales at corporate stores
contributed 94.0% of total sales, while sales to non-corporate stores
contributed 6.0%, compared to 91.6% and 8.4%, respectively, in fiscal year
2010.

For the six months ended December 31, 2010 and 2009, the
Company generated revenues of $12,020,072 and $12,869,080, respectively,
reflecting a decrease of 6.6% . Excluding exchange rate effect, sales at
corporate stores decreased 2.8% while sales to non-corporate stores declined
47.9% . Besides the stock replenishment issue as a result of a nation-wide
restriction on power supply affecting both corporate and non-corporate store
sales, a reduced number of non-corporate stores further contributed to the
decline in non-corporate store sales. For the six months ended December 31,
2010, sales at corporate stores contributed 93.2% of total sales, while sales to
non-corporate stores contributed 6.8%, compared to 88.0% and 12.0%,
respectively, in fiscal year 2010.

18

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The following table shows changes in our sales at existing
stores, changes in sales due to stores opened during the three and six months
ended December 31, 2010 and 2009, and the effect of change in rate used for the
currency conversion in three and six months ended December 31, 2010 and 2009:

Three months ended December 31
    
    Six months ended December 31Corporate
    
    
    Non-Corporate
    
    
    
    
    
    Corporate
    
    
    Non-CorporateTotal Sales
    
    
    Stores
    
    
    Stores
    
    
    Total Sales
    
    
    Stores
    
    
    StoresChange in sales at existing stores
    
    (1,377,657
    )
    
    (1,114,567
    )
    
    (263,090
    )
    
    (1,602,698
    )
    
    (828,909
    )
    
    (773,789
    )Sales at new stores opened in FY2011
    
    456,097
    
    
    435,212
    
    
    20,885
    
    
    517,197
    
    
    496,312
    
    
    20,885Effect of currency conversion
    
    177,053
    
    
    158,827
    
    
    18,226
    
    
    236,493
    
    
    208,125
    
    
    28,368Total increase (decrease) in sales
    
    (744,507
    )
    
    (520,528
    )
    
    (223,979
    )
    
    (849,008
    )
    
    (124,472
    )
    
    (724,536
    )


Comparable Store Sales.The percentage change in
comparable store sales by stores type for the three and six months ended
December 31, 2010 as compared to 2009 is as follows:

|                     |  | Three months ended |  |  | Six months ended | 
|-------------------- |  | ------------------ |  |  | ---------------- | 
|                     |  | December 31        |  |  | December 31      | 
|Corporate stores     |  | -23%               |  |  | -17%             | 
|Non-corporate stores |  | 16%                |  |  | -13%             | 

A store is included in comparable store sales ("Comp") when it
has been open for at least 12 months and the square footage has not changed by
15 percent or more within the past year. A store is included in Comp on the
first day it has comparable prior year sales. Stores in which square footage has
changed by 15 percent or more as a result of a remodel, expansion, or reduction
are excluded from Comp until the first day they have comparable prior year
sales. Current year foreign exchange rates are applied to both current year and
prior year Comp store sales to achieve a consistent basis for comparison.

A store is considered non-comparable ("Non-comp") when it has
been open for less than 12 months or it has changed its square footage by 15
percent or more within the past year. Non-store sales such as online revenues
are also considered Non-comp.

A store is considered "Closed" if it is temporarily closed for
15 or more full consecutive days or is permanently closed. When a temporarily
closed store reopens, the store will be placed in the Comp/Non-comp status it
was in prior to its closure. If a store was in Closed status for 15 or more days
in the prior year then the store will be in Non-comp status for the same days in
the following year.

Sales per average square foot is as follows:

|                                        |   | For the three months ended December 31, |  |   | For the six months ended December 31, | 
|--------------------------------------- | - | --------------------------------------- |  | - | ------------------------------------- | 
|                                        |   | 2010                                    |  |   | 2009                                  | 
|Sales per average square foot
      (1) | $ | 37                                      |  | $ | 41                                    | 

(1) Sales per average square foot is calculated
based on the total sales divided by the average total store area of stores in
existence throughout the period.

19

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Store count, openings and closings for our stores are as
follows:

Three months ended 31 December, 2010
    
    
    Three months ended 31 December, 2009Corporate
    
    
    Non-corporate
    
    
    
    
    
    Corporate
    
    
    Non-corporateStores
    
    
    Stores
    
    
    Total
    
    
    Stores
    
    
    Stores
    
    
    TotalNumber of stores as of October 1
    
    126
    
    
    32
    
    
    158
    
    
    126
    
    
    50
    
    
    176Number of stores opened
    
    14
    
    
    1
    
    
    15
    
    
    20
    
    
    3
    
    
    23Number of stores closed
    
    6
    
    
    5
    
    
    11
    
    
    12
    
    
    13
    
    
    25Number of stores as of December 31
    
    134
    
    
    28
    
    
    162
    
    
    134
    
    
    40
    
    
    174


Six months ended 31 December, 2010
    
    
    Six months ended 31 December, 2009Corporate
    
    
    Non-corporate
    
    
    
    
    
    Corporate
    
    
    Non-corporateStores
    
    
    Stores
    
    
    Total
    
    
    Stores
    
    
    Stores
    
    
    TotalNumber of stores as of July 1
    
    131
    
    
    34
    
    
    165
    
    
    127
    
    
    53
    
    
    180Number of stores opened
    
    23
    
    
    2
    
    
    25
    
    
    34
    
    
    10
    
    
    44Number of stores closed
    
    20
    
    
    8
    
    
    28
    
    
    27
    
    
    23
    
    
    50Number of stores as of December 31
    
    134
    
    
    28
    
    
    162
    
    
    134
    
    
    40
    
    
    174


Cost of Goods Sold and Gross Margin

Cost of goods sold was $3,003,546 for the three months ended
December 31, 2010 as compared to $3,818,038 for the same period in FY2010, a
decrease of 21.3% while the gross margin increased from 49.2% to 55.6% .
Excluding exchange rate effect, cost of goods sold at corporate stores declined
28.3%, more than the decrease in sales at corporate stores mainly because of a
reversal of $1,119,656 inventory markdown in FY2011 as compared to an increase
of $2,258 in inventory reserve in FY2010 due to better inventory management and
liquidation of prior year products. As a result, the gross margin for corporate
store sales increased by 7.0% . Excluding exchange rate effect, cost of goods
sold to non-corporate stores decreased 28.3% as compared to the three months
ended December 31, 2009, which is less than the decline in non-corporate store
sales due to higher discount offered to non-corporate store owners as a result
of the stock replenishment issue. The gross margin from sales at non-corporate
stores decreased by 9.6% as compared to the gross margin for the same period in
FY2010.

Cost of goods sold was $4,970,030 for the six months ended
December 31, 2010 as compared to $7,365,503 for the same period in FY2010, a
decrease of 32.5% while the gross margin increased from 42.8% to 58.7% .
Excluding exchange rate effect, cost of goods sold at corporate stores declined
31.6%, more than the decrease in sales at corporate stores mainly because of a
reversal of $1,485,204 in inventory markdown in FY2011 as compared to an
increase of $276,046 in inventory reserve in FY2010 due to better inventory
management and liquidation of prior year products. As a result, the gross margin
for corporate store sales increased by 16.4% . Excluding exchange rate effect,
cost of goods sold to non-corporate stores decreased 46.2% as compared to the
six months ended December 31, 2009, which is in line with the decline in
non-corporate store sales. The gross margin from sales at non-corporate stores
decreased by 2.3% as compared to the gross margin for the same period in
FY2010.

Selling, General and Administrative
Expenses.

Selling, general and administrative expenses consist of store
rent, agency fees, maintenance and new store opening expenses, freight,
advertising and marketing costs, office rent and expenses, costs associated with
store staff and support personnel who manage our business activities, and
professional and legal fees paid to third parties.

For the three months ended December 31, 2010, the Company
incurred selling, general and administrative expenses of $2,887,635, a decrease
of 28.6% as compared to $4,045,821 for FY2010.

20

---

Our general and administrative expenses decreased 238.7% as
compared to last year mainly because of a reduction in bad debt allowance as a
result of better accounts receivable management. The Company in general has
arranged 60-day collection terms with shopping malls if not otherwise specified.
Despite most of our accounts receivable balances being current (within 60 days),
11.7% of accounts receivable balances were aged more than 90 days at December
31, 2010, a decline from 26.0% at June 30, 2010. The Company provided full
allowance balances aged more than 90 days except for those that are subsequently
collected. For the three months ended December 31, 2010, the Company reversed
allowance of $466,181 compared to $-0- for the same period last year. The
balance of bad debt allowance was $587,591 and $921,203 on December 31, 2010 and
2009, representing 10.9% and 24.3% of the total accounts receivable balance,
respectively.

We incurred selling expenses of $3,163,031 for the three months
ended December 31, 2010, a decrease of 17.8% as compared to $3,847,214 for the
three months ended December 31, 2009. Of all the selling expenses, store rent in
the amount of $1,296,325 constituted 41.0% and decreased by 6.5% compared to the
same period of last year due to a decrease in corporate store sales. Agency fees
constituted 26.0% of total selling expenses for the three months ended December
31, 2010 and decreased by 23.2% when compared to the same period in 2009 mainly
due to the change to exclude the store rent from the sales basis to calculate
agency fees. A decrease in corporate store sales also contributed to the decline
of agency fees. Salaries and benefits, which constituted 12.2% of total selling
expenses for the three months ended December 31, 2010, decreased by 1.8% as
compared to the same period in 2009 due to temporary reduction of store
assistants as a result of the replenishment issues and decline in corporate
store sales. Other selling expenses constituted 20.8% of total selling expenses,
of which $271,030 was spent on store charges and promotion and $155,695 was
spent on new store opening / build-out and existing stores' maintenance /
decoration. The rest of other selling expenses included utilities, phone,
supplies and mall maintenance charges for opened stores.

For the six months ended December 31, 2010, the Company
incurred selling, general and administrative expenses of $5,888,187, a decrease
of 10.3% as compared to $6,564,664 for FY2010.

Our general and administrative expenses decreased 40.1% as
compared to last year mainly because of a reversal of bad debt allowance as a
result of better accounts receivable management. For the six months ended
December 31, 2010, the Company reduced such allowance by $352,532 versus $-0-
for the same period last year. For the six months ended December 31, 2010, the
Company incurred $83,304 bad debt as a result of closing three non-corporate
stores. The Company was founded not long ago and has a short operation history.
In view of the rapid expansion of our business since inception, we believe that
we have been conservative in providing sufficient allowance for ageing accounts
receivable balances.

We incurred selling expenses of $5,698,780 for the six months
ended December 31, 2010, a decrease of 8.8% as compared to $6,248,618 for the
six months ended December 31, 2009. Of all the selling expenses, store rent in
the amount of $2,359,420 constituted 41.4% and decreased by 0.6% compared to the
same period of last year in line with the change in corporate store sales.
Agency fees constituted 23.5% of total selling expenses for the six months ended
December 31, 2010 and decreased by 19.3% when compared to the same period in
2009 mainly due to the change to exclude the store rent from the sales basis to
calculate agency fees. Salaries and benefits, which constituted 12.9% of total
selling expenses for the six months ended December 31, 2010, increased by 7.0%
as compared to the same period in 2009 due to increase in store assistants and
staff compensation in the first quarter of FY2011 offset by a temporary
reduction of store assistants in the second quarter of FY2011 as a result of the
replenishment issues and decline in corporate store sales. Other selling
expenses in the six months ended December 31, 2010 constituted 22.2% of total
selling expenses, of which $510,975 was spent on store charges and promotion and
$307,669 was spent on new store opening / build-out and existing stores'
maintenance / decoration. The rest of other selling expenses included utilities,
phone, supplies and mall maintenance charges for opened stores.

21

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Other Expenses

We had the same interest-bearing loans for the three and six
months ended December 31, 2010 and 2009. Interest expense amounted to $31,497
and $31,046, respectively for the three months ended December 31, 2010 and 2009
and $62,748 and 62,148 for the six months ended December 31, 2010 and 2009,
respectively.

Provision for Income Taxes

The Company recognized $-0- current income tax expense due to
the loss carried forward, which offset the income before tax for the three and
six months ended December 31, 2010. $-0- current income tax expense was also
recognized for the same periods in 2009 as a result of net loss. Income tax
expense for the three and six months ended December 31, 2010 and 2009 was also
$-0-because of the valuation allowance the Company set up for deferred tax
assets.

Net Income

As a result of the foregoing, the Company had a net income of
$844,587 as compared to a net loss of $385,264 for the three months ended
December 31, 2010 and 2009, respectively. We had a net income of $1,107,969 and
a net loss of $1,123,235 for the six months ended December 31, 2010 and 2009,
respectively.

Liquidity and Capital Resources

As of December 31, 2010, we had cash and cash equivalents of
$274,375 and the Company's current liabilities
exceeded its current assets by $5,452,235 and the Company's total liabilities
exceeded its total assets by $5,998,681. Our auditor has expressed their concern as to our ability
to continue as a going concern in the audit opinion of our financial statements
for the year ended June 30, 2010.

The following table provides detailed information about our net
cash flows for the financial statement periods presented in this annual report:

|Cash Flow                                               |  | For the six months ended
      December 31, |  
|------------------------------------------------------- |  | ------------------------------------------- | -
|                                                        |  | 2010                                        |  
|Net cash used in operating activities                   |  | (2,582,107                                  | )
|Net cash used in investing activities                   |  | (10,082                                     | )
|Net cash provided by financing activities               |  | 2,680,844                                   |  
|Effect of foreign currency translation on cash and cash |  | 5,244                                       |  
|Net decrease in cash and cash equivalent                |  | 93,899                                      |  

Our principal demands for liquidity are for expansion and
opening new stores, working capital and general corporate purposes.

Net Cash Used in Operating Activities. Net cash
used in operating activities totaled $2,582,107 for the six months ended
December 31, 2010 as compared to $3,352,513 for the six months ended December
31, 2009. The decrease in net cash used in operating activities was primarily
due to the settlement of accounts payable to third party suppliers of $1,745,278
for the six months ended December 31, 2009 as we gradually shifted most of the
purchases from third party suppliers to CTS, a related party supplier. For the
six months ended December 31, 2010, the balance of accounts payable to third
party suppliers increased by $181,584. The difference was partially offset by an
increase in the inventory balance by $1,581,757 for the six months ended
December 31, 2010 versus $461,930 for the same period in 2009 as a result of
delay of receipt of merchandise delivery from suppliers towards the year-end as
a result of a nation-wide restriction on power supply to achieve the energy
saving and emission reduction target for the Chinese government's "11th Five-Year Plan".

Our accounts receivable increased from $3,784,745 at June 30,
2010 to $5,384,394 at December 31, 2010 mainly due to business expansion and
sales increases during major sales seasons in October and December due to the
National Day, Christmas and New Year holidays. Sales increases contributed to
the larger amount of outstanding accounts receivable to be collected from
shopping malls, with which we generally have established 60-day collection
terms. The Company has put in place a very rigorous review process of
outstanding accounts receivable balances. At December 31, 2010, we had $758,133 in accounts receivable aged in excess of 60 days,
among which $632,508 was aged over 90 days, compared to $1,204,393 in excess of
60 days including $985,067 over 90 days at June 30, 2010. Full allowance has
been provided for the balance over 90 days and not subsequently collected. As a
result, allowance for doubtful accounts decreased from $921,203 as of June 30,
2010 to $587,591 as of December 31, 2010 due to a decrease in balances aged over
90 days. Considering that the accounts receivable balances aged between 60 days
and 90 days at December 31, 2010 was not material, and was subsequently settled,
no bad debt allowance was provided with respect to such balances. For the six
months ended December 31, 2010, the Company incurred $83,304 bad debt as a
result of closing of three non-corporate stores. We believe that we have been
conservative and have provided sufficient allowance for ageing accounts
receivable balances.

22

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Net Cash Used in Investing Activities. Net cash
used in investing activities was $10,082 and $10,083 for the six months ended
December 31, 2010 and 2009, respectively.

Net Cash Provided by Financing Activities. Net
cash provided by financing activities totaled $2,680,844 and $3,310,230 for the
six months ended December 31, 2010 and 2009, respectively. The decrease mainly
represented the loan of RMB5,000,000 we borrowed on July 22, 2009.

We believe that we can satisfy our cash requirements during the
next 12 months through reduction of expenses associated with retail store
openings, better management of our inventory and realization of our accounts
receivables. We have experienced rapid growth in both sales and store numbers
since 2008. The Company has adjusted its strategy to slow down the new store
openings and focus on digesting inventory of past seasons and improving revenue
and margin from existing stores in the fiscal year 2010, which is expected to
continue in fiscal year 2011. The Company has successfully established a tiered
inventory digesting structure through Class A stores, Class B stores and
warehouse sales. Class A stores sell current season products at full price,
Class B stores sell one-year-old products at a 30-50% discount while warehouse
sales digest products aged more than one year at a 80-90% discount. Class A
stores are expected to sell 70% of products of each season with the rest sold
through Class B stores and warehouse sales. The tiered structure is meant to
ensure that most, if not all, of the inventory can be digested within 24 months
after production. In addition, warehouse sales scheduled in the next twelve
months are expected to generate revenue of about $1.5 million. Sales from Class
A and Class B stores are expected to be around $23 million in the next twelve
months. We believe that cash generated from the stores and warehouse sales in
the next twelve months will be sufficient to cover payment for inventory
purchases and selling, general and administrative expenses of around $21
million. Concurrent with the establishment of a tiered inventory digesting
structure to increase sales and liquidate the inventory in a timely fashion, the
Company is also striving to encourage cash purchases from non-corporate store
owners, settle long-aged account balances and maintain the realization of new
accounts receivable from shopping malls within 60 days.

Our accounts payable are mainly due to our related party with
whom we have negotiated and have established a favorable six-month payment term
with an additional extension if the payment would materially impact the
Company's liquidity profile. This policy should effectively prevent further
deterioration of the Company's cash position.

The Company has successfully amended its loans due in June,
2010 and January, 2011 and extended the term with the lenders to June, 2011, respectively. Those loans are borrowed externally from third
parties.

23

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In addition, the Company believes it can meet its liquidity
requirements for working capital and general corporate purposes during the 2011
fiscal year from a variety of other sources. These sources include renewal of
outstanding debts when due, new short or long-term borrowings from both related
and unrelated parties and financial institutions, and future equity financings
although there is no assurance that additional financings, whether debt or
equity, will be available.

Loan Facilities

At December 31, 2010, we had $810,160 in long-term debts. The
long-term debts consisted of the following:

|                                                                                                              |   | December 31, 2010 |  |   | June 30, 2010 | 
|------------------------------------------------------------------------------------------------------------- | - | ----------------- |  | - | ------------- | 
|Amount borrowed from our CEO, bearing
      interest at 5% per annum and due February 17, 2013                | $ | 810,160           |  | $ | 810,160       | 
|Amount borrowed from an unrelated party, bearing interest
      at 10% per annum and due June 16, 2011        |   | 860,676           |  |   | 839,359       | 
|Amount borrowed from an unrelated party,
      bearing zero interest and due June 30, 2011, guaranteed by CTS |   | 754,979           |  |   | 736,279       | 
|                                                                                                              |   | 2,425,815         |  |   | 2,385,798     | 
|Less: current portion                                                                                         |   | 1,615,655         |  |   | 1,575,638     | 
|                                                                                                              | $ | 810,160           |  | $ | 810,160       | 

Future annual  principal payments of long-term debts are as follows:

Twelve months ended December 31

|2011 | $ | 1,615,655 | 
|---- | - | --------- | 
|2012 |   | -         | 
|2013 | $ | 810,160   | 

Interest expense amounted to $31,497 and $31,046, respectively
for the three months ended December 31, 2010 and 2009 and $62,748 and 62,148 for
the six months ended December 31, 2010 and 2009, respectively.

Obligations Under Material Contracts

Below is a table setting forth our contractual obligations as
of December 31, 2010:

Payment due in year ended June 30,Total
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterLong term debt obligations (including
      current portion)
    $
    2,425,815
    
    $
    1,615,655
    
    $
    -
    
    $
    810,160
    
    $
    -Operating lease obligations
    
    1,149,188
    
    
    855,643
    
    
    280,126
    
    
    8,946
    
    
    4,473Purchase obligations
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
    $
    3,575,003
    
    $
    2,471,298
    
    $
    280,126
    
    $
    819,106
    
    $
    4,473


Seasonality

Since we are in the fashion clothing retail industry, store
traffic is usually heavier during the calendar year end's shopping season and
various public holidays in China throughout the year, especially the Chinese
spring festival which usually falls in February, the Labor Day holidays around
May 1st and National Day holidays during the week around October
1st.

24

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Critical Accounting Policies and Estimates

The accompanying consolidated financial statements include the
financial statements of Baby Fox International and its wholly owned subsidiary
Shanghai Baby Fox. All significant inter-company transactions and balances have
been eliminated in consolidation. Baby Fox International and its subsidiary
Shanghai Baby Fox together are referred to as the Company.

Our management's discussion and analysis of our financial
condition and results of operations are based on the consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported net sales and expenses during the reporting periods. On an ongoing
basis, we evaluate our estimates and assumptions. We base our estimates on
historical experience and on various other factors that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

While our significant accounting policies are more fully
described in Note 2 to our consolidated financial statements included , we
believe that the following accounting policies are the most critical to aid you
in fully understanding and evaluating this management discussion and analysis:

Revenue Recognition and Return Policy. Our
revenues are generated from sales at our company-owned retail stores and from
sales of merchandise to licensed non-corporate owned stores. Revenues from sales
at company owned retail stores are recognized when the ultimate customer
purchases the merchandise in the store and pays for it at the cash register.
Customers have the right to return merchandise for credit, exchange or refunds
according to department stores' policy for up to fourteen days after purchase.
The return policy is set by corporate headquarters and consistent among all our
corporate stores. Period allowed for return is short (two weeks) and based on
historical experience, actual returns by end consumers have been rare and
immaterial across all retail stores. Management will keep monitoring returns by
end consumers at our corporate stores as we open more stores each period.

Revenues from sales to licensed non-corporate stores are
recognized at the date of shipment to the non-corporate stores when a formal
arrangement exists, the price is fixed or determinable, and no other significant
obligations of the Company exist and collectability is reasonably assured.
According to the contract, non-corporate stores have the right to return
defective merchandise within ten days of receipt. Return of unsold merchandise
for current style is determined by our headquarters and full cooperation from
non-corporate stores is required. Reserves are established to reflect actual and
anticipated returns of defective and unsold merchandise based on historical
information. Currently we estimate returns to be 20% of our sales to
non-corporate stores and relevant reserves have been made accordingly each
reporting period. Since fashion clothing is trending towards shorter product
life cycles and the return period we allow for non-corporate stores is
relatively long, current reserves already take into the effect of introducing
new products on expected return of previous products. The return reserve based
on this percentage of sales has been consistent with actual returns in our
operating history. As we continue to open more non-corporate stores, we will
closely monitor returns for existing and new stores and adjust reserve for
returns if necessary. We do not offer early payment discounts, incentive
discounts based on volume or credit for products that do not sell well at
non-corporate stores. Shipping and handling of merchandise sold to non-corporate
stores is not separately billed to customers or paid directly by the customer.

Marketing Expenses. Due to the short
initial term of the leases with mall operators and the cancellation provisions
contained in the store leases, the initial costs of store opening expenses are
typically accounted as marketing expenses and are charged to expense as
incurred. The cost of leasehold improvements and store fixtures averaging
$21,750 are charged to expense as incurred. The effect of store openings could
potentially reduce our reported net income in the period of store openings.

25

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Inventories. Inventories, consisting of finished
goods and accessories, are valued at the lower of cost as determined by the
average cost or market. Cost includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable condition. Due to the
high style nature of the Company's merchandise, slow moving, out of season and
broken style merchandise is sometimes sold at warehouse sales below cost.
Reserves are created to reduce the carrying value of these items to market
value.

The company maintains a perpetual inventory and sales report,
by store location. This is updated daily based upon shipping and sales reports.
A weekly review is made by the merchandising group and management to identify
slow moving merchandise. Merchandise which is slow moving during the first month
at a store is reported to the head office, and is sometimes moved to other
stores, due to varying style demand in the diverse markets in China. Unsold
merchandise is then marked down, and if not sold within 90 days of receipt, it
is shipped back to the warehouse. The company then has periodic discount
warehouse sales and uses certain liquidators.

The company maintains a reserve for inventory markdowns. This
encompasses current goods held for liquidation and markdown, and application of
historical percentages of current inventory which is anticipated to be marked
down and /or liquidated. The percentages were 26% and 42% of ending inventory
levels as of December 31, 2010 and June 30, 2010, respectively, based on
historical experience and current goods held for liquidation, and reserves are
made accordingly at each reporting period. The company periodically adjusts the
percentage based on a review of changing ratios and the percentage of selling
prices recovered through liquidation.

Off Balance Sheet Treatment for Store Opening and Rent
Expenses

Because mall operators can terminate our leases any time and
have no obligation for renewal of our leases, we did not capitalize our
leasehold improvements and store fixtures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK

Not required.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal
executive officer and principal financial officer, Mr. Huang and Ms. Chen,
respectively, evaluated the effectiveness of our disclosure controls and
procedures. The term "disclosure controls and procedures," as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this report, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on that evaluation, Mr. Huang and Ms. Chen concluded that as of December
31, 2010, our disclosure controls and procedures were effective to satisfy the
objectives for which they are intended.

Changes in Internal Control Over Financial Reporting

During the quarter ended December 31, 2010, there were no
changes in our internal control over financial reporting identified in
connection with the evaluation performed during the fiscal year covered by this
report that has materially affected, or is reasonably likely to materially
affect our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

There has been no material change in the Company's risk factors
as previously disclosed in the Company's Annual Report on Form 10-K filed with
the SEC on September 28, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

|Exhibit No. | Description                                                                                                                                                                                                                        
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        | Certification of Principal
      Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2        | Certification of Principal Financial Officer
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
|32.1        | Certification of Principal
      Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 
|32.2        | Certification of Principal Financial Officer
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.                                                                 

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SIGNATURES

In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                         | BABY FOX INTERNATIONAL, INC.                                              
|------------------------ | --------------------------------------------------------------------------
|                         |                                                                           
|Date: February 14, 2011  | By: /s/ Jieming
      Huang                                               
|                         | Jieming Huang                                                             
|                         | Chief
      Executive Officer                                             
|                         | Principal Executive
      Officer                                         
|                         |                                                                           
|Dated: February 14, 2011 | By: /s/ Ping
      Chen                                                   
|                         | Ping
      Chen                                                           
|                         | Chief
      Financial Officer                                             
|                         | Principal Financial
      Officer and Principal Accounting 
       Officer

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EXHIBIT INDEX

|Exhibit No. | Description                                                                                                                                                                                                                        
|----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1        | Certification of Principal
      Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the
      Securities Exchange Act of 1934, as amended, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.
|31.2        | Certification of Principal Financial Officer
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.
|32.1        | Certification of Principal
      Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 
|32.2        | Certification of Principal Financial Officer
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.                                                                 

30

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